business-reporting-july-2010-marks-plan

Warranty provision although the balance is not

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Warranty provision - Although the balance is not material, the key audit consideration here will be whether it is complete and understatement could potentially be material. Additional audit procedure Need to assess provision based on the number of months warranty given, historic experience of warranty claims and any known issues or problems with IT equipment supplied. Going concern sign off is not required on each individual company for the sign off of group accounts. However the overall cash position of the group is relevant and this looks poor, especially given that first installment of £1 million on long term debt is due in 4 months time on 1 November 2010 and Aducit has very high trade payables. Although companies are profitable, there are also signs (comment on inventory provision) that trading is difficult. In addition, significant proportion of profit is generated abroad and there may be issues in repatriating the cash to the UK to repay the loan. Additional audit procedures Need to consider carefully cashflow forecasts and ability of company to repay its debts as they fall due. In addition, terms of the loan agreement need to be reviewed and covenant compliance assessed both now and over the next year as any breach of covenant might render the entire debt repayable immediately. Should also chase bank letter in Aducit even though bank balance is not in itself material. Bank letter also provides details of any loan accounts and other arrangements and is an important piece of audit evidence. Tax position on Aducit looks incorrect as no tax credit recognised at present. Would expect there to be group relief and company has also clearly been profitable in the past so there may be the opportunity to carry back losses. Need to investigate but would expect credit of around 28% - ie £243,000 which is potentially material. Additional audit procedures Need to enquire further as to tax position, obtain draft computations and determine to involve a tax expert as necessary. Ed Holdings Agreeing investment of this size to bank statement alone is clearly inadequate Additional audit procedures Need to review sale and purchase agreement for Bhagat to ensure no additional consideration payable, adjustments to consideration, warranties etc which need to be considered. Also need convincing evidence of ownership of shares through share certificates etc. Important to check that ownership is 100% as has been assumed in consolidation entries. Need to enquire as to how any costs related to the acquisition of Bhagat have been treated as these do not appear to have been included within the investment value. Need to ensure that Ed Holdings has not issued any shares in year through review of minutes and of documents filed at Companies House. Review of Board minutes and legal correspondence for the holding company are important tests which do not appear to have been performed / documented.
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